RIGHTS OF VARIOUS TYPES OF CREDITORS IN PROPERTY UNAVAILABLE TO THE DEBTOR WHEN SATISFACTION cannot be obtained out of the general assets of a debtor, creditors will often attempt to realize on claims which are not avail- able to the debtor himself. Some of these claims arise out of transactions which injure debtor and creditors alike; others grow out of dealings which work injury only to creditors. While in appropriate circumstances these transactions will give rise to a cause of action,1 that cause of action will be vested not in all creditors, but only in those who are deemed to be injured. For the purposes of this comment it will be assumed that all of the other elements of recovery are present; an attempt will then be made to determine what sort of creditor may, and what sort may not, realize on the various claims unavailable to the debtor.2 Further investigation will be made of the assertion of such claims by a representative of creditors; for on such occa- sions similar questions are raised, though they are framed in terms of the extent of the representative's recovery, and the methods of distributing the recaptured property. A creditor who attempts to recover on claims unavailable to the debtor will normally rely on one of two theories. In situations falling under the first theory the debtor appears to be in command of greater resources than are actually at his disposal-a misleading impression that is created through the complicity, or at least passive acquiescence, of a third party. The basis of recovery, then, will be that credit was extended in reliance on the mis- representations attributable to that party. Accordingly the creditor will have to show as a minimum that he extended credit subsequent to the creation and. prior to the termination of the appearance of greater resources; and any actual knowledge of the true state of the debtor's affairs will preclude recovery. In transactions of the second type-broadly classified as fraudulent con- veyances-the debtor has in some way dissipated his assets. The basis of the cause of action will be that creditors have been deprived of some assets which were available to satisfy their claims. But this theory will grant pro- tection only to creditors whose claims were in existence at the time of the transaction; creditors who extended credit to a debtor with already depleted assets cannot ordinarily recover. Such creditors will be granted a right of action only if they are able to show that the debtor intended to defraud them 1. See, generally, materials cited in notes 6, 10, 13, 40, 57, infra. 2. Some of the fact situations dealt with can involve only corporate debtors. In order to insure the validity of the comparisons made, cases involving such debtors have been used in all situations as far as possible. But since such cases are not everywhere to be found, it has been thought best not expressly to limit the subject-matter of the comment to corporate debtors. 1938] RIGHTS OF VARIOUS TYPES OF CREDITORS 1165 -a theory of recovery somewhat similar to that advanced in the "apparent ownership" cases. Aside from these general theories, one other factor may operate to dis- criminate between creditors. It is usually said that, before making a claim which is unavailable to the debtor, the creditor must have exhausted his remedies against the general assets.3 But this requisite does not make for any fundamental distinction between creditors; rather it imposes a procedural obstacle which any creditor can normally surmount. In any case the "ex- haustion" requirement has received a liberal interpretation with comparative uniformity; wherever it seemed superfluous, it has been relaxed.4 In some- what the same way the courts have searched out ways of avoiding the general theoretical requirements in cases of apparent merit. But far from achieving uniformity in this respect, the methods of escape have varied not only with particular courts, but with the particular transaction as well. The types of creditors who may recover can thus be determined only by an examination of each of the more commonly recurring claims. Since property subject to a mortgage or conditional sale agreement is generally retained in the possession of the debtor, he may appear to be en- dowed with the attributes of complete ownership. Creditors who assert that they have extended credit on the faith of this apparent ownership may attempt to avoid the mortgage on the ground that the mortgagee was a party to the deception. Since a claim of this nature could conceivably be made wherever a debtor's property was mortgaged, recording statutes were evolved to define the rights of the parties more precisely.t The reliance theory runs through these statutes, but only in incomplete form. Thus when a mortgage is duly recorded, recovery by creditors is precluded; recordation is deemed to con- vey knowledge to all the world and thus to negate any intent to deceive as 3. Braun v. American Laundry Mach. Co., 56 F. (2d) 197 (S. D. N. Y. 1932). Strictly this rule requires that the creditor obtain a judgment against the debtor and that execution be returned unsatisfied. Hannan v. Hardee, 69 F. (2d) 394 (App. D. C. 1934). 4. Gaskins v. Bonfils, 8 F. Supp. 832 (D. Colo. 1934). Thus insolvency of the debtor generally obviates the requirement. Williams' Ex'r v. Chamberlain, 123 Ky. 150, 94 S. IV. 29 (1906). Likewise a trustee in bankruptcy need not prove that he represents judgment creditors. Williams v. Browstein, I F. (2d) 470 (D. Me. 1924) ; Union Trust Co. v. Amery, 67 Wash. 1, 120 Pac. 539 (1912). The same may be true of a state court receiver. See v. Heppenheimer, 69 N. J. Eq. 36, 61 Ati. 843 (Ch. 1905) ; cf. Cooney Co. v. Arlington Hotel Co., 11 Del. Ch. 430, 106 At. 39 (Sup. Ct. 1918). But cf. Sharp v. Hawks, 80 F. (2d) 731 (C. C. A. 8th, 1936) (federal court receiver) ; Commerce Trust Co. v. Woodbury, 77 F. (2d) 478, 488 (C. C. A. 8th, 1935). And a trustee should not have to allege exhaustion of corporate assets. Benner v. Billings, 107 Wash. 1, 181 Pac. 19 (1919). For the effect of the Amendment of 1910 to § 47(a) of the Bankruptcy Act, see McLean v. Green, 171 Miss. 183, 157 So. 251 (1934). Under the Uniform Fraudu- lent Conveyance Act even a judgment is not necessary before a creditor may move to set aside a fraudulent transfer as there defined. American Surety Co. v. Conner, 251 N. Y. 1, 166 N. E. 783 (1929); see Glenn, The Uniform Fraudulent Corveyoance Act; Rights of Creditor Without Judgment (1930) 30 Cot.. I 1Ev. 202. 5. See VLsH,MOrTGAGES (1934) § 28 et seq.; cf. Comment (1928) 37 YAve L. J. 494. 1166 THE YALE LAW JOURNAL tVol.47: 1164 well as the possibility of reliance.8 When the mortgage is not recorded, re- covery is still limited to those who could possibly have relied. Accordingly a creditor must show that his claim arose after the mortgage was executed and before it was recorded. But once this is demonstrated, no further proof of reliance is necessary ;7 the creditor will be automatically protected unless there is a showing that he knew of the mortgage agreement. Further statutory delimitation of the right to recover bears no relation to the reliance theory; this may be said of the requirement in the majority of statutes that a lien be acquired before recordation.8 And completely inconsistent with the theory is the occasional decision holding a mortgage invalid as against a creditor whose claim arose before the agreement was made, but who obtained a lien in the period between the execution of the agreement and its recordation., Closely related to the unrecorded mortgage is the type of situation where the debtor is in apparent ownership of property, though he is under an equitable or even moral obligation to transfer it to the real owner. Such obligations can not be recorded; and if the equitable owner has allowed the debtor to treat the property as his so as to invite credit on that basis, creditors who "relied" on this representation may be able to make a good claim against the property.1 0 But unlike the case of the unrecorded mortgage, where the mere failure to record is sufficient to give rise to a general right of recovery, there must be an actual showing of the specific acts or omissions of the equitable owner tending to reveal bad faith and to put the debtor in appar- ently complete ownership. 1 Once the general cause of action has been estab- lished, distinctions are made between creditors purely on' a basis of possible reliance. So long as a claimant has shown that he extended credit after the creation and before the termination of the equitable obligation, no proof of actual reliance will be required.1 2 6. See Comment (1919) 28 Ywt L. J. 685. 7. Becker Co. v. Gill, 206 Fed. 36 (C. C. A. 8th, 1913); Townsend v. Ashepoo Fer- tilizer Co., 212 Fed. 97 (C. C.A. 4th, 1914); Ruggles v. Cannedy, 127 Cal. 290, 53 Pac. 911, 59 Pac. 827 (1899); Klingensmith v. Clow & Sons, 273 Mich. 48, 262 N. W. 644 (1935); American Multigraph Sales Co. v. Jones, 58 Wash. 619, 109 Pac. 103 (1910); Ryan Drug Co. v. Hvambsahl, 89 Wis. 61, 61 N. W. 299 (1894). 8. Morey & Co. v. Schaad, 98 N. J. L. 799, 121 Atl. 622 (1923); see UNIOrO CONDITIONAL SALF-S AcT § 5; UNIFORM CHATTEL MORTGAGE AcT § 42-2 (not yet adopted in any state).